Should we opt for a Pre-Pack Administration or Company Voluntary Arrangement?
Choosing between a Pre-Pack Administration and a CVA hinges on your company’s cash flow, creditor relationships, and long-term viability. In my experience of advising distressed businesses, I’ve found that the urgency of your financial situation often dictates the most appropriate path.
Pre-Pack Administration is typically the right choice if:
Your company requires immediate action to preserve value
There’s insufficient funding to continue trading while seeking alternative buyers
You wish to preserve the value of the business, particularly when skilled staff retention is crucial
Secured creditors want to acquire the business until market conditions improve
You wish to shed unsustainable debts and start afresh
A CVA might be more appropriate if:
Your business is fundamentally viable but struggling with temporary financial difficulties
You have a realistic prospect of returning to profitability
Creditors are likely to support a formal repayment plan
Maintaining existing contracts, licenses, and business relationships is crucial
How do Pre-Pack Administration and CVAs Differ?
Pre-Pack Administration:
Involves a swift sale of the business, typically to a new company
Can often be completed within a matter of days
Doesn’t require creditor approval
Results in no dividend payments to unsecured creditors
Typically more costly to implement than a CVA
Requires disclosure of administration status in all business communications
Triggers an investigation into directors’ conduct
Pre-Pack Administration is overseen by an insolvency practitioner[1]Trusted Source – GOV.UK – Pre-pack sales in administration. The process usually begins with negotiating sale terms before the administrator is appointed. Once in place, the administrator swiftly executes the pre-arranged sale, enabling the business to continue under new ownership. The original company is generally dissolved post-sale.
Company Voluntary Arrangement (CVA):
Allows the existing company to continue trading
Restructures debts with creditor agreement
Requires 75% creditor approval by value
Enables partial repayment to creditors over time
Generally less expensive to implement than a Pre-Pack
Doesn’t require disclosure of CVA status to customers
Results in remaining debt being written off at the end of the CVA
A CVA can only be proposed by directors, an administrator, or a liquidator[2]Trusted Source – GOV.UK – Company Voluntary Arrangements. The process typically takes several weeks to arrange, beginning with the appointment of an Insolvency Practitioner (IP). The IP develops a CVA proposal, including a repayment plan, which creditors then vote on. If approved, the company continues to operate under the agreed terms.
Summary
While Pre-Packs offer a quick solution, they may burn bridges with creditors and suppliers. CVAs, though slower, can preserve valuable relationships and goodwill.
Consider your company’s core strengths. If your business relies heavily on its existing contracts, licenses, or brand reputation, a CVA may be the better route. However, if your company’s value lies primarily in its assets or workforce, a Pre-Pack could be more advantageous.
The market context is also crucial. In rapidly evolving industries, the speed of a Pre-Pack might be necessary to preserve value. In more stable sectors, the breathing space provided by a CVA could be invaluable.
Ultimately, the right choice depends on whether you believe your company’s challenges are fundamental or temporary.
Need Advice?
If you are unsure which one is the best solution for your insolvent company, contact us on 0800 074 6757, or via the live chat support.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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